This document discusses strategies for companies to manage complexity and increase profit margins. It begins by describing how increasing globalization, customization, and technological sophistication have led to greater product, customer, and operational complexity for many companies. This complexity often hides real costs that significantly reduce profitability. The document then recommends that companies: 1) Analyze product cost and value data to understand profitability and position products on a "cost/value matrix" to determine strategic actions. 2) Explore eight strategies to reduce complexity across the value chain and increase margins by 25-100%, including making complexity transparent, applying the 80/20 rule, optimizing cross-functional processes, and bundling product features.

1. Mastering Complexity
Capture the Hidden Opportunity
Aaron Brown, Bernd Elser, Reinhard Messenböck, Felix Münnich,
and Satoshi Komiya
July 2010

2. Mastering Complexity
Capture the Hidden Opportunity
M
anaging complexity and its related costs is a growing challenge for companies. The increas-
ingly global nature of business gives rise to diverse customers and markets, convoluted
supply chains, and vast supplier networks. The trend toward product customization allows
customers to “have it their way” but wreaks havoc on production schedules and inventory
management. Parts and components proliferate on warehouse shelves, sophisticated technologies and
formulas underlie even the most basic products, and our gadgets have more features and functionality
than ever before. The costs of this increasing complexity are often hidden, but they are almost always a
significant drain on profitability.
Even complexity that is translated into additional revenues, such as product or service enhancements that
customers value and are willing to pay more for, and that differentiate a company from the competition—
or that result in greater customer satisfaction and loyalty—can hurt the bottom line if the value it delivers
in increased revenues isn’t greater than its real costs. Driving out needless complexity from product and
customer portfolios, manufacturing operations, and supply chains can be an effective way to increase
margins, boost efficiency, strengthen the core business, and improve asset and resource utilization
throughout the enterprise. Unfortunately, few companies apply the analytical rigor needed to fully
understand the tradeoffs.
For instance, product variety can be a competitive differentiator, but it requires more designers and
engineers, more components and raw materials, more changeovers in production lines, higher inventory
levels, more plant and equipment, and more people to market, support, and manage the product and
customer portfolios. Many of these costs are indirect and not readily apparent.
Few companies truly understand the underlying economics of product variety and other types of complex-
ity. As a result, they either underestimate the total impact of product and portfolio complexity on their
operations or end up cutting out too much—or the wrong things—to save money. Nor do accounting
systems always facilitate clarity. Because these systems tend to allocate costs on the basis of a single
universally applicable algorithm (such as volume sold) rather than actual incurred expenses, lower-volume
items often end up with less than their share of allocated costs, even if they consume more time and
effort. The problem also extends to pricing. When companies lack a full understanding of costs in applying
a “cost-plus” pricing model, they often underprice their more complex products—and lose money as a
result.
With greater cost transparency and the right strategies for effectively managing complexity across the
enterprise, companies can achieve an enormous payoff: a 25 to 100 percent increase in profit margins.
This paper offers a systematic approach for weighing the cost/value tradeoffs of different products,
provides guidance on how to optimize the total profitability of the product portfolio, and offers specific
strategies for mastering complexity throughout the value chain.
The Hidden Costs of Complexity
The full impact of product and portfolio complexity on operations is rarely obvious, even though it is felt
across the entire value chain. (See Exhibit 1.) It hides in and between functions, departments, and regions,
where employees see only slices of the problem. The people in sales, for instance, may see only a complex
product portfolio. But plant managers wrestle with the challenges of production planning and scheduling,
supply chain managers deal with rising inventories, and finance managers see a growing level of invest-
ment in fixed assets.
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3. Mastering Complexity 2
Exhibit 1. Portfolio Complexity Drives Operational Complexity
Across the Value Chain
Complexity driver Impact on operations and organization Complexity driver
Organization and processes
Portfolio Portfolio
complexity complexity
R&D Raw Inbound Production Outbound Marketing
materials logistics logistics and sales
Products Customers
Assets and resources along the value chain
Source: BCG analysis.
With so many cost factors to consider (related to location, product mix, plant capabilities, and supply chain
design), relying on assumptions, intuition, or gut feeling often leads to the wrong decisions about which
products add the most value and which to prune from the portfolio.
For the best results, companies need to gather and analyze the right data from their operations: revenues
and costs by product line and profit or cost center; production volumes by production location and product
line; cost, capacity, and utilization of equipment; overhead related to support functions; and inbound,
outbound, and intraplant logistics. These data will provide a fairly complete cost picture by product line.
Companies must then quantify and model three key factors that drive cost:
◊ Scale: the effect of volume on costs per unit
◊ Efficiency: relative productivity, utilization (average and peak), and process complexity (automation,
handovers, and standardization)
◊ Factor costs: input costs (such as labor), operating costs (such as fuel or IT), and logistics costs (such as
shipping)
A detailed analysis will reveal the most relevant cost drivers and the relative effect of each on different
products in the portfolio. The cost per unit of production goes up or down depending on the interplay of
drivers such as production volume (scale), equipment utilization rates (a measure of efficiency), and local
labor rates (a factor cost), along with overall process and supply-chain complexity. Armed with this
information, companies can gain important insights into the relative profitability of different products and
what levers to pull to minimize the costs of complexity—and increase profit margins. In this context,
reviewing existing pricing practices may also yield immediate opportunities.
Optimizing the Product Portfolio: The Cost/Value Matrix
The total costs of each product must be weighed against the value delivered in terms of revenues and
competitive differentiation. Because companies have a tendency to overestimate the relative advantages
of their products and product features, a deep understanding of the market and consumer behavior is
critical—what different customer segments want, what they’re willing to pay, and what competitors are
offering. Customer interviews, surveys, and focus groups can provide valuable insights, as can key suppli-
ers. Make a dispassionate comparison of your products, costs, and capabilities against those of other
The Boston Consulting Group July 2010

4. Mastering Complexity 3
players in the market. Consider where your products are in their life cycles. This analysis will help deter-
mine how differentiated your products really are and how best to position future offerings.
Companies can plot their products on a cost/value matrix that has two dimensions: the degree of value or
competitive advantage that specific products offer and the operating margin of each product after sub-
tracting direct costs and SG&A expenses. (See Exhibit 2.) The result is a view of the product portfolio that
furnishes insight into which products provide the greatest value and offers guidelines for how to improve
profitability, streamline the total number of offerings, and strengthen the overall portfolio. Products will
fall into one of four quadrants:
◊ Advance (High-Margin, High-Advantage Products). Products in the upper right quadrant rank high along
both the cost and value dimensions. They are highly profitable and have a strong competitive advan-
tage relative to other products in the market. Companies should commit to advancing these products by
building on their differentiating value—the variety, quality, or features they offer—and by streamlining
operations to increase margins even further. Look for ways to leverage the advantages of these products
to gain share or enter new markets. Consider the most effective ways to sell these products, too. A large
financial-services company, for example, deliberately restricted its portfolio of available investment
products so that its sales reps could understand the products more deeply and sell them more effective-
ly—at a lower overall cost.
◊ Streamline (Low-Margin, High-Advantage Products). Products in the lower right quadrant are highly
differentiated but not very profitable, an indication that prices are too low or costs are too high—or
both. The goal here is to increase margins by some combination of raising the price, reducing service
levels, and minimizing product or operating complexity. Again, look for ways to reduce SKUs, ingredi-
ents, or components, or to simplify product design and specifications. To further minimize costs and
inefficiencies, consider transferring sales to a distributor, adjusting service levels for support functions,
and streamlining and standardizing processes. A global white-goods manufacturer’s main product line
used many different technical components and user interfaces for different markets. By creating a
common platform and reducing the number of components and interfaces, the company cut product
complexity by almost 70 percent; reduced line changeovers, inventory, and scraps; and reduced the
number of people needed to handle material and supervise assembly.
◊ Maintain (High-Margin, Low-Advantage Products). Products in the upper left quadrant of the cost/value
matrix are profitable but lack a competitive edge relative to other offerings in the market. The first
Exhibit 2. Weigh the Cost and Value of Each Product and Take Appropriate Action
Classify products into four quadrants Increase value with
quadrant-specific actions
◊ Build on the product’s differentiating value
75 ◊ Leverage product advantages to gain share
Maintain Advance Advance or enter new markets
◊ Revisit pricing strategies
Product ◊ Minimize product complexity (for example,
profitability 50 reduce SKUs or ingredients, or simplify specs)
aer direct Streamline
◊ Simplify and streamline internal processes
costs and ◊ Adjust service levels or increase prices
SG&A
(percent of ◊ Increase differentiating value, if possible;
sales) 25 if not, limit any new investment
Maintain ◊ Optimize cash flow by cutting costs and
complexity
Phase out Streamline ◊ Cut costs if the product is marginally profitable
0
Low High Phase out ◊ Discontinue or phase out the product if its cash
Product-specific contribution is negative
competitive advantage
Product-related revenues
Source: BCG experience.
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5. Mastering Complexity 4
order of business is to try to strengthen this position by finding new ways to add differentiating custom-
er value. If this isn’t possible, or if strategic relevance is minimal, then the key is simply to maintain the
position: strictly limit new investment and optimize the cash contributions of these products by reduc-
ing costs and operating complexity. For instance, look for ways to simplify specifications or minimize
SKUs, ingredients, or components. Consider cutting back on sales support or using a distributor to
minimize selling costs.
◊ Phase Out (Low-Margin, Low-Advantage Products). Products in the lower left quadrant rank poorly along
both dimensions. They are minimally profitable and not highly differentiated relative to competing
products. These are often the most mature products in the portfolio, with margins that have steadily de-
clined as competitors have entered the market. Since these products often consume valuable resources
and can end up as cash traps, cut costs wherever possible and improve the economics by such actions as
bundling or cross-selling with other products. Regularly monitor the profitability of these borderline
products, and phase them out if their cash contribution becomes negative.
Unless the two dimensions of cost and value are evaluated together, companies can mistakenly target new
products for elimination because of their low margins. Our cost/value approach ensures that new, compet-
itively differentiated products aren’t dropped before they have had a chance to reach critical mass in the
market.
It’s important to explore various improvement levers before discontinuing a product prematurely. Many
marginally profitable products can become profitable if one or more aspects of operations are adjusted.
For example, an analysis of the product portfolio of a chemical company showed that 50 of its 80 products
fell short of the company’s profitability targets. By reducing marketing expenses, charging customers for
technical support, and increasing minimum order sizes, in addition to implementing just-in-time supply
purchases and consolidating make-to-order production runs, the company was able to achieve profitability
targets for 20 of those 50 products.
Of course, decisions about portfolio optimization must always be made in the context of strategy. A
dispassionate review of the product portfolio can help companies clarify the positioning of their products
relative to the competition, pinpoint products with the greatest potential for enhancement, and identify
areas where operational complexity can be reduced to increase margins. This approach can also uncover
high-cost, low-value products that can be eliminated with very little negative impact—assuming that your
premium customers don’t depend on them—while streamlining the portfolio by minimizing the number
of products overall.
Eight Strategies for Mastering Complexity
Evaluating the product portfolio is an essential first step toward balancing the costs and value of product
complexity. But before making any final decisions about where and how to prune the product portfolio, it
is critical to explore the impact not just of the actions determined by the cost/value matrix but also of a
broader set of initiatives that will drive down complexity and its related costs throughout the value chain.
We recommend the following eight strategies.
Make complexity transparent. Analyze and expose areas where complexity arises in an organization and
what the related costs and benefits are. This step is crucial for several reasons. First and foremost, you can
only fix what you can see. Second, to reduce complexity over the long term, companies must have the right
incentives and metrics in place to motivate managers and to track progress over time.
A large industrial-goods company instituted a simple measure of complexity to streamline and reduce the
costs within its organization. The company created a global “complexity index” for each department by
multiplying the number of portfolio products, brands, legal entities, production sites, and suppliers and
dividing the result by total sales. The company then worked to decrease this baseline complexity index by
taking actions such as cutting out low-performing products, reducing sales force costs, and consolidating
the supplier base. Improvements to the index were tracked over time and resulted in savings of 10 percent
of associated costs after only one year.
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6. Mastering Complexity 5
Apply the “80/20” rule. In many companies, the 80/20 rule prevails—that is, 20 percent of customers or
products account for 80 percent of revenues. This rule can also apply to complexity. To see if it does, first
analyze which products and customers account for 80 percent of revenues, and which resources and assets
are needed to support them along each step of the value chain. Do the same for the products and custom-
ers that account for the remaining 20 percent of revenues. You may be surprised to find that this smaller
segment uses a disproportionate share of assets and resources. Optimizing these margin-sappers will
reduce costs and complexity throughout your company’s operations and free up resources and assets that
can be put to more profitable use.
A chemical company with a large portfolio of products found that 40 percent of its products accounted for
almost 90 percent of revenues. For each product, the company rigorously analyzed the competition’s
technological barriers to entry and the hurdles customers would face to switch to a competitor’s product.
Pruning products with a low score on both counts allowed the company to reduce its product portfolio
by almost 40 percent, reduce fixed assets by almost 20 percent, and sharply increase overall asset produc-
tivity.
Optimize the whole, not the separate silos. Silo vision tends to hinder any efforts to systematically
reduce operational complexity. Without a cross-functional, end-to-end perspective across the entire
enterprise, managers tend to focus on their own functions or departments. This silo thinking is a source of
process complexity. To streamline processes and minimize costs, companies should analyze all critical,
cross-functional processes, as well as those that serve purely internal purposes. Measure factors such as
time, cost, errors, volume, and the number of people and touchpoints involved. This analysis will reveal
processes and process steps that are high-cost and inefficient—and that have the greatest potential for
improvement. Look for ways to standardize processes across regions and functions, and automate wherev-
er possible.
Segregate complexity into separate systems. By separating complex products and processes and dealing
with them as outliers, you can make the more standard aspects of the business as efficient, streamlined,
and low-cost as possible. For instance, when a complex product must be built to customer specifications,
segregate this product line and its manufacturing processes and then optimize the facility for standard
items. Look for ways to unbundle complex products, find platforms or components that can be made in
bulk, and separate high-volume production from finish work, customization, and final assembly. For
instance, if a product has many variations but is built on a basic platform, manufacture the platform in
high volume to keep costs down—and ship to a centralized facility for final configuration or regional
customization as orders come in.
Bundle features together to “standardize” complexity. Automobile manufacturers have mastered this
strategy because they’ve had to—customers have an endless series of options to choose from, starting
with basics such as model type, engine type and size, and tires. Add to this the comfort and fashion
choices such as the sound system, heating system, seat cover, and paint job. Taken together, these choices
represent millions of potential variations. By bundling groups of popular features into standard pack-
ages, automakers are able to simplify production and increase margins while providing more value to
customers.
Define plant and asset roles. To minimize manufacturing complexity and get more from your production
network, match asset characteristics with the needs of specific products and customers. Consolidate
products with similar characteristics, and explore ways to reallocate products across the network for
greater cost savings, flexibility, and efficiency. Looking across your company’s production network, define
specific plant roles, such as the following:
◊ High-Volume Assets. These production assets are dedicated to high-volume manufacturing of a limited
number products, with few changeovers.
◊ Multiproduct or Flexible Assets. For a broader portfolio of lower-volume products, or for products with
volatile or unpredictable demand, use production assets with short changeover times to increase
versatility and flexibility.
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7. Mastering Complexity 6
Be sure to use the right assets for each product group. One manufacturer was using high-speed packaging
lines for low volumes of product with frequent changeovers, which increased complexity, eliminated scale
benefits, and resulted in higher unit costs than if the company had used more flexible, less technically
complex (and less costly) lines. By defining specific asset roles—such as “high-volume packaging asset” or
“low-volume packaging asset”—and setting strict guidelines for allocating products to assets, the company
increased output by 34 percent and reduced unit costs by 25 percent in six months.
Set and document guidelines for asset roles and product allocation, and regularly monitor adherence—
especially when new products are launched or new capital investments are considered.
Identify roadblocks—and delayer. Complex organization structures add layers and interfaces that can
slow decision making, obscure responsibilities and accountability, and lead to “orphaned” costs that lack a
clear owner and are not managed or scrutinized as a result. This complexity often extends beyond the
enterprise to include joint ventures, equity investments, suppliers, subcontractors, and other partners. As
the number of people involved in a process increases, the number of interfaces grows exponentially and
can virtually paralyze an organization.
Addressing organizational complexity demands a big-picture view. Analyze networks and information
flows to identify silos and roadblocks, and keep an eye out for relevant processes that lack clear ownership.
The interdependencies and interfaces among functions are often hidden, and important elements can fall
through the cracks. Clarify responsibilities, especially for tasks and processes that bridge organizational
units.
The flexibility and decision-making capabilities of a consumer goods manufacturer were hampered by a
complex organization structure with unclear accountabilities, a maze of dotted reporting lines, and
numerous “microteams” with five or fewer people and a manager. By rigorously mapping the layers and
spans of control for all organizational units and major departments, the company managed to pinpoint
where organizational complexity was particularly severe. An organizational redesign driven by top
management cut back on the number of microteams by as much as 60 percent in some departments and
reduced the number of organizational layers from nine to seven. As a result, the company is more flexible,
makes decisions more quickly, and is more responsive to customer needs.
Challenge assumptions and model new scenarios. The impact of complexity on costs and assets is rarely
clear-cut. By modeling different optimization scenarios, your company can get a better sense of where the
potential for improvement is the greatest. Often, the insights gained are counterintuitive. For example,
one pharmaceutical company had a product portfolio with many low-volume products. This led to fre-
quent changeovers of production equipment and high fixed costs per unit. Because asset utilization was
high, however, the production managers doubted that any major productivity gains were possible. Model-
ing the impact of different scenarios for reducing complexity showed that eliminating the low-volume
products would free up significant capacity while only marginally reducing overall output and revenues.
By following through on this recommendation, the company was able to streamline its product portfolio
and close a production site, which decreased fixed costs substantially without hurting its most strategic
products and customers.
Keep in mind that streamlining operations and minimizing complexity are iterative processes. Whenever
your company delayers the organization or prunes products or customers from the portfolio, look for
opportunities to consolidate production and close a plant, service center, or back-office unit. (See the
sidebar “Extreme Complexity-Busting: Rethinking the Business Model.”)
Staying Vigilant
Reducing complexity is often approached as a one-time effort. But business growth can lead to new
products and customers, so companies must be vigilant about sustaining results. To keep complexity from
creeping back, ensure that it can be measured easily, set targets and pragmatic guidelines that minimize
the number of unique components in product offerings, and establish minimum order sizes. Limit the
number of changeovers per production asset and the degree to which service offerings can be adjusted to
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8. Mastering Complexity 7
Extreme Complexity-Busting
Rethinking the Business Model
Most complexity-reduction efforts target existing Henry Ford’s zero-complexity approach to automo-
structures and processes. But thinking out of the bile production proved to be a breakthrough. “Peo-
box can propel your company forward by orders of ple can have the Model T in any color—so long as
magnitude, leaving “business as usual”—and the it’s black,” he famously proclaimed. With an assem-
competition—in the dust. Develop radical, green- bly line and mass production, he revolutionized the
field scenarios by brainstorming ideas that the com- industry. And the automobile, which had once been
pany has never considered before. Ask the following a plaything for the rich, became affordable to the
questions: What would our business model look like average American.
if we offered only one product? If we outsourced all
manufacturing? If we sold only online? If we sold
only to China? What impact would these changes
have on production, logistics, sales, and financial
performance?
a customer’s specific situation. Make it a requirement that new products be screened for their hidden
complexity costs and value-chain impact. Although companies typically consider whether a new product
can be made with existing plant and equipment, the impact on asset productivity—changeovers, ramp-
ups, and the resulting downtime—is often overlooked.
Because reducing complexity is a cross-functional effort, establish cross-function oversight to drive and
sustain the initiatives and monitor progress. Many leading companies empower their product-develop-
ment teams to review new-product designs and even to veto development if, for instance, the number of
unique components is too high or too few standard components are used.
A complexity scorecard with a few critical metrics for each value-chain step and function can be a valu-
able management tool, especially if integrated into reporting routines. For instance, the scorecard could
track how many resources (production, service, and so on) the most profitable customers use, or rank
assets by the number of changeovers or schedule changes in a given time period. Typically, business- or
customer-specific scorecards provide the most valuable input.
The main benefits of reducing complexity come not just from pruning the product portfolio or eliminating
unprofitable customers but from enabling major improvements in asset and resource utilization across the
value chain. Consolidating production and making it more efficient frees up capacity that can absorb
growth without adding fixed assets, so capital can be allocated with more focus—delivering greater value
at lower costs. Streamlined processes allow companies to handle more customers and products without
adding resources. The result is a more competitive and profitable business model.
A lthough complex products or greater variety can differentiate a company in the marketplace, they
also drive operational complexity and add costs to the production processes, supply chain, and
overall organization structure that support the business. For most companies, it is an ongoing challenge to
maintain margins and a competitive edge. Mastering complexity can dramatically reduce costs,
strengthen the core business, and pave the way for faster, more profitable growth.
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9. Mastering Complexity 8
About the Authors
Aaron Brown is a partner and managing director in the Chicago office of The Boston Consulting Group.
You may contact him by e-mail at brown.aaron@bcg.com.
Bernd Elser is a principal in the firm’s Frankfurt office. You may contact him by e-mail at
elser.bernd@bcg.com.
Reinhard Messenböck is a partner and managing director in BCG’s Berlin office. You may contact him by
e-mail at messenboeck.reinhard@bcg.com.
Felix Münnich is a project leader in the firm’s Munich office. You may contact him by e-mail at
muennich.felix@bcg.com.
Satoshi Komiya is a partner and managing director in BCG’s Tokyo office. You may contact him by e-mail
at komiya.satoshi@bcg.com.
Acknowledgments
The authors wish to thank Harold L. Sirkin, Jérôme Richard, and Martha Craumer for their contributions
to this White Paper.
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading
advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-
value opportunities, address their most critical challenges, and transform their businesses. Our custom-
ized approach combines deep insight into the dynamics of companies and markets with close collabora-
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advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private
company with 69 offices in 40 countries. For more information, please visit www.bcg.com.
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